Thursday, 24 May 2018

Today the author attended the “Shareholder Engagement in the
EU” Conference in the European Parliament building in Brussels, Belgium. The
conference was developed as part of a massive research project funded and ‘hosted’
by Aarhus University, though it has spread across the continent. Whilst this
post will not go into detail on every talk in the conference today, certain
aspects of the talks will be used to discuss the overarching and extremely
important issue of ‘shareholder engagement’. There were a number of influential
contributors at today’s event so those not included in today’s post are only
excluded for the purpose of brevity, and nothing else. The event was a
fascinating event in that it brought together a really good mix of scholars who
specialise in the area, as well as practitioners who are being affected by
regulatory developments; the details of the event can be found here.

The conference was concerned with a number of aspects
relating to shareholder engagement, but the focus of the conference was on the
EU’s Shareholder
Rights Directive and its associated effects. The speakers at the event
are far more informed on this matter than the author, but in relation to the
issue a number of aspects come to mind. It seems, after listening to the
differing perspectives presented on the topic, that the Directive is
contentious, but only from within the parameters of one’s viewpoint on the
ordering of the marketplace (as usual). On one side of the debate is the
viewpoint that encouraging shareholders/investors to play a more active role in
the governance of a company is a worthy endeavour and can be achieved by
providing a defined framework from within which such activism can occur.
However, the related issues such as the so-called ‘Corporate Governance
Statements’, for example, (the author will have an article published on this
very topic shortly) lend themselves to the idea that providing more information
to the investment sphere will result in increased engagement – the sentiment
being that shareholder engagement has been lacking over the absence of the right type of information. Yet, one
issue that stems from this is that whilst the aim is on increasing investor engagement
in relation to the companies they are investing in, in reality the aim is to
encourage a systemic shift in attitude, all of which will be dependent upon the
investors. The point was made today in the conference that, quite often,
investors are only interested in one thing: returns. A good point was made by
Professor Todd
Henderson in his closing remarks that if the average ‘saver’ wants to act
in a ‘sustainable’ way (he also made the great point that it is important not
to merge the concepts of “sustainability” and other factors such as “ESG”),
then they will likely take personal action like buy an electric or a hybrid car
rather than a diesel or petrol-powered vehicle – engaging in investment
practice is rarely the concern of the average ‘saver’. This sentiment with
regards to the position of the investors does indeed raise a number of
concerns, but Professor Henderson continued by raising the point that enforcing
public companies to abide by certain
codes may have the effect of pushing the majority of companies to go private so as to allude the costly
compliance with those associated codes – he referenced the effect in the US of
the same concept, which has witnessed a dramatic reduction in public companies
since the enactment of a number of similar codes.

Ultimately, there is still plenty of work to be done in this
area. Whilst the aim is not to please everyone (as that is clearly
unobtainable), it was fascinating to see the divide within the conference,
between those believing in the power of rules to dictate the direction of the
market (whether hard or soft), and those who believed in the power of the
marketplace to determine its own future. This is, of course, an age old
delineation that only gets stronger with time, but one aspect was clear from
the conference, and that is that investors and the dynamics that define that
concept are absolutely key to the development of the marketplace, either way. There
were a number of suggestions put forward in relation to resolving the issue of
shareholder engagement, but it was difficult to overlook the fact that these
issues are, perhaps, fundamental to
the system we inhabit. The concept of the dispersed investor is, when
considered enough, at the root of almost every financial issue in the modern age;
if a company incorporates short-termism, it is often to placate dispersed
investors who majoritively focus on returns. If a company’s management wants to
take a longer-term view, it is often hampered by concerns over whether the plan
will be palatable to those same investors. This viewpoint places a lot of
emphasis upon the ‘dispersed investor’, and in truth this author does not
necessarily follow that school of thought. Rather, it is more likely that this
concept of the ‘dispersed investor’ is a very handy concept as it is unseen,
and can be used to cover up a range of inadequacies (and that is a very polite
term). Other entities must shoulder a lot of the blame of the development of this
‘culture’ we see today, including politicians, certain schools of scholarly
thought, and perhaps most obviously the media – the media is remarkably adept
at playing on this notion of a ‘crisis’ within a firm at any given moment, and
its ‘effect’ upon shareholders. On that basis, whole industries are formed to
continue that narrative, when in reality the actual viewpoints of those putting
money into this massive machine – let us use the example of a pension holder in
a large firm – are rarely analysed, considered, discussed, or advanced in
common debates. The optimism from some of the contributors today was really
good to see, and will no doubt provide impetus for change within the sector.
However, that optimism is not shared by this author, who views these
machinations as purely cyclical, upon which there will be future crises on the back of this concept of ‘shareholder
engagement’ – the system demands it.

Wednesday, 23 May 2018

In today’s post, the focus will be on the so-called “Big
Four” audit firms – PwC, KPMG, Deloitte, and E&Y – after details of the
collapse of construction firm Carillion continue to have a significant effect.
We will examine these calls to dismantle the long-standing oligopoly, but there
will be a discussion about what these calls actually mean. This author has
advanced the notion of a ‘divergence’ existing when it comes to regulating
oligopolies (specifically in relation to the Credit Rating industry), and it
will be discussed whether this is the case in this particular instance also.
There will also be some reference to a forthcoming book by this author on this
very topic.

The calls for the dismantling of the audit oligopoly could
stem from a number of instances in reality, but the current calls stem from the
collapse of Carillion. We have covered this collapse here in Financial Regulation Matters since the first
warning-signs were uttered, but the revelations regarding the passive
action of the associated auditors before the company’s collapse have
renewed calls for a new approach to how auditing services are provided. With
auditors being accused of ‘lining their pockets’ in relation to Carillion, the
Labour Party has been extremely vocal in calling for the oligopoly to be
dismantled. John McDonnell recently declared that if his party was to come to
power, then the firms would no longer be able to ‘act
like a cartel’. He also declared that ‘there
will be no more Carillion on Labour’s watch’. Essentially, McDonnell is
taking aim at the regulatory framework, which was confirmed when he continued
his attack by discussing the number of regulators in the field, and also
the fact that a number of key market participants are essentially
self-regulated. These calls have been echoed, in a loose sense, by others
including the chief regulator for the sector in Britain, the Financial
Reporting Council. Whilst not seeking the dismantling of the oligopoly, the FRC
have launched an investigation into whether the firms should be forced to ‘spin-off’
their auditing businesses, with the result being that there are rumours that
the firms are actively
preparing for the onslaught coming their way. However, are these claims,
suggestions, and investigations all as they seem?

Whilst McDonnell was adamant in his view that there will be
no more collapses like Carillion on his (and his Party’s) watch, that is a
tremendously easy thing to proclaim when one has no power. Perhaps the reality
is slightly different if we consider that the collapse of Carillion was,
fundamentally, because of deep-rooted systemic
issues rather than simple policy ones as McDonnell’s sentiment suggests. This
leads us nicely to this concept of a ‘divergence’ being in operation. In the
author’s forthcoming book Regulating the
Credit Rating Industry: Restraining Ancillary Services (to be released in
August), this concept of a ‘divergence’ is presented in detail, but for our
purposes a simple explanation will suffice. In relation to the credit rating
industry, the ‘divergence’ exists when regulators and legislators take aim at the
industry and introduce measures such as increasing competition; the ‘divergence’
relates to a ignorance of a simple reality that is the very nature of an oligopoly is that competition is
fundamentally reduced. Another simple reality of an oligopoly is that, whether
directly or indirectly, the oligopoly by its design works together to protect itself; this can be done in a number of
ways but an obvious and representative method is a member of the oligopoly
never deviating from accepted methodologies in relation to their practice, so
as to not cause a significant disturbance to the marketplace – this is a key
component of the ratings industry, and the same can be seen in the audit
industry if one looks closely enough.

Yet, the biggest issue with the current wave of criticism is
that it pays not attention, whatsoever, to the history of the sector. The
rating industry is over 160 years old but that pales in comparison to the audit
industry. As a result, the firms are actually gargantuan businesses with their
operations being truly global in size, which has the effect of making them a.
extraordinarily wealthy and b. extraordinarily influential. The obvious claim
to make is that this will allow the firms to protect themselves rather
adequately in the facing of the oncoming regulatory pressure, but history tells
us that McDonnell’s vision will, unfortunately, never come to fruition. If one
examines developments within a given financial sector (particularly with
financial service providers), and studies those developments in parallel with a
study of the economic cycles, one will quickly realise that we have been here
before. In the wake of the Enron scandal, the auditing industry came in for
massive amounts of pressure, and as a result were forced to divest from their
consulting businesses which lay at the root of the scandal. Whilst the rating
industry would both learn and profit from the divestment (the model was
fundamentally incorporated by the agencies [as described in the forthcoming
book] and many of the consulting components were swallowed up by the CRAs), the
audit sector would go on to simply bide their time until the economic cycle
swung back to a boom – only a handful of years passed before the firms were
allowed to build up these divisions again under a different moniker. It
surprises this author greatly that the audit firms did not come in for more
criticism in the wake of the financial crisis, because they were indeed
involved, but perhaps they had learned not to be so brazen in their practice –
the rating agencies are presumably going through that very same process as we
speak. Yet, it is difficult to be optimistic when one studies history, because
it is more than likely that once ‘regulatory amnesia’ sets in, as it will, then
the chances of the audit industry having its influence lessened becomes an
illusion that is, in reality, probably damaging on the long-run. The effect of
this understanding is that it leads to political questions that have no real answer
(perhaps). Examining McDonnell’s claims, is it the case that he fully intends
to ensure that Carillion-type scandals can never happen again and that he will
dismantle the audit oligopoly, or is it the case that these issues are making
the headlines and his claims are the obvious ones to make when playing the
position of the opposition? The aim here is not to criticise McDonnell nor
doubt his integrity, but it is important to remember that this is politics and
with that come a whole host of connotations. The sentiment put forward here is
that if one aims at an industry as it
should be without considering how
that industry performs in reality, then that divergence leads to misapplied
regulation, which has the effect of maintaining the dominance of that
particular industry.

The author’s specialism is in the field of credit ratings,
and it can be seen quite clearly in that sector that the divergence that
surrounded post-crisis endeavours has
actually strengthened the rating oligopoly, not weakened it. It is likely
that this current wave of anti-audit sentiment will do the same if such
large-scale measures like dismantling the oligopoly are the aims. In a
forthcoming book by this author entitled Regulating
Financial Oligopolies (to be released in 2019), the focus is on this very
divergence and how the regulators see the actual process of regulating an
oligopoly, and more important how
they consider it when taking regulatory action. The underlying thesis to many
of this author’s works is that incremental regulation is optimal, rather than
large-scale headline-grabbing regulation that is rarely effective; limiting the effect
of these financial oligopolies and guiding them towards fulfilling their function rather than exploiting their
engrained positional advantage is surely more of a practical aim that outright
destruction of oligopolies that are centuries old. With that in mind, it
appears the opposite sentiment will be incorporated in the near regulatory
future of the audit industry, and unfortunately that sentiment only ever has
one consequence – failure.

Thursday, 10 May 2018

For months we have been discussing the impending fine that
RBS was facing from the US DoJ with regards to their behaviour in the lead-up
to the Financial Crisis, and today RBS learned its fate. In this third and
final brief post today, we shall look at the details of that fine and examine
both the sentiment it creates, and any potential effect it may have upon RBS as
it continues its attempt to drag itself from a scandal-ridden decade.

The issue of RBS being fined by the DoJ has been on the table
for quite some time, with a number of elements coming in to play as RBS and
investors struggled to predict the outcome. We spoke recently about how even
the British government had inserted itself into the dynamic (lest we forget,
the UK Government is the majority shareholder in the bank), and it seems that
for all parties concerned, apart from the victims and the public of course,
today’s announcement will be being toasted in the offices of the bank (and
likely the Government) at the time of writing. The bank has agreed
a $4.9 (£3.6) billion penalty with the DoJ, which led CEO Ross McEwan to
proclaim that ‘today’s
announcement is a milestone moment for the bank’ and that ‘our current
shareholders will be very pleased this deal is done’. That is not surprising
given that estimations beforehand were that the bank would be forced to pay
anywhere up to $9 or $10 billion.

There was an instant impact, with share prices immediately
rising and, as cited in The Guardian,
the likelihood now being that the Bank will now be able to pass the Bank of
England’s stress testing mechanisms. However, there is likely to be an even
greater impact moving forward. In a previous post today we discussed the
concept of ‘amnesia’ within the financial sector, and developments such as
these are often the very moments that initiate that amnesia. That is not to
say, of course, that the bank should be prosecuted consistently, but it is the
sentiment that these moments cause which is the issue. The sentiment from the
business press, and RBS themselves, have not been ‘let us put this issue behind
us finally and seek to really address the underlying problems that caused such
poor behaviour’, but more ‘let us put this issue behind us finally and get back
to making money and providing dividends’; one may argue those two sentiments
are closely related, but they are not. One has within it the conscious effort
to re-develop the bank’s obviously transgressive approach, the other has the
aim of returning to a ‘results at whatever cost’ attitude that led to the bank
being charged almost $10 billion all told – the continuation of these
sentiments is remarkable, but only when you do not pay attention to the systemic issues within the sector. It is
unfortunate, but as the Bank continues to be the archetypal transgressive
banking institution – its performance in relation to the GRG unit is appalling –
the reality is that it is just one small component of a larger system that is
designed, or has been adopted to continuously milk society; today’s
announcement is a victory for RBS and the UK Government, but in truth it is a
clear indication that it is ‘business as usual’.

This very brief post reacts to the news that Andrew Tyrie
has taken control of the Competition and Markets Authority. In a previous post
where were reviewed Tyrie’s work as head of the Treasury Select Committee, we
asked where would Tyrie go next and what impact will he have? Now we know, it
would be good to provide a brief review of his new endeavour and examine the
importance of his appointment.

Across
the business media, Tyrie’s appointment has been roundly applauded, and
this is mostly because of his effectiveness whilst in charge of the Treasury
Select Committee. However, his appointment will be extremely interesting to
monitor, because it is worth questioning whether his performance was due to his
character, or that of the Treasury Select Committee – Nicky Morgan, since
taking over from Tyrie, has been particularly forthright in her battle with
some of the leading financial figures, with her performance over the RBS GRG
scandal earning rave reviews. Yet, regular readers of Financial Regulation Matters will be more than aware that this
author is often particularly scathing of Conservative MPs and their policies,
but in Tyrie there exists somewhat of a contradiction. He earns praise from
across the board, and it is easy to see why – taking on such industrial
powerhouses, and often winning, is no easy feat and Tyrie has developed a
reputation for doing just that – it is indeed a very positive thing. Yet, one
has the nagging feeling that it is the Treasury Select Committee which is the
real vehicle for those sorts of interventions, so it will indeed be fascinating
to see how Tyrie conducts himself in his new role.

This first of three brief
posts today looks at a subject we have covered here in Financial Regulation Matters a number of times, and that is the
concept of a financial whistle-blower. The story we have covered most is the
story of Jes Staley, the CEO of Barclays (here
and here),
but although that case resulted in a (relatively) small fine, news recently
suggests that the protections afforded to financial whistle-blowers need to be
strengthened much more, both in light of the recent actions of leading members
of the financial services but also because of the period that we are in –
making sure transgressions in the financial sector are identified and expressed
(either publically or to regulators) is crucial as we move away from the last
financial crisis.

There are a number of
issues affecting Lloyds at the moment, but most stem from their takeover of
HBoS and the fraud that was uncovered within a division in Reading. We have
covered this story a number of times (here),
but the sentiment put forward by Lloyds is that the transgressions all took
place before the takeover, and that they had no knowledge of the purposeful
destruction of many SMEs. It was reported as far back as October 2017 that
Lloyds’ behaviour towards their whistle-blowers was ‘disgraceful’, firstly by
making those whistle-blowers ‘prove
they were victims’, and then in January 2018 it was reported that a
whistle-blower who had formulated a damning report into the scandal in 2013 had
been made
redundant without the necessary compensation. More recently, the Financial Times has reported that Lloyds
tried to ‘silence’
the whistle-blower and that, contrary to the bank’s claims, the Reading Fraud
had been discussed in internal emails within Lloyds as far back as February
2008. The effect of this is that Lloyds has been catapulted into the limelight
over the protections it offers to whistle-blowers, which of course is a vital
component against ‘white-collar crime’.

The Police Commissioner’s
suggestions have been refuted by the Bank, but with investigations continuing
into the scandal there is a likelihood that more revelations will surface
regarding the knowledge Lloyds had which will then impact upon the perception
of actions they have taken since. This is an extremely negative chain of
events, but there is one positive in that the concept of the whistle-blower has
been forced into the limelight at a time when that concept is as vital as ever.
When one considers the cyclical dynamic of the economy, then one can see that
we are potentially moving into a phase whereby ‘amnesia’ sets in and trust is
restored in the very same system that created the last crisis – that phase is
not quite upon us yet, but it is not far. Claims to act in a counter-cyclic
manner in terms of regulation are very sensible and would eliminate the current
rate of a crisis of some sort occurring every ten years (arguably), but the
chances of those claims being recognised and implemented as the calls for ‘growth’,
‘development’, or another buzz word that is consistently used to enable the
financial sector to return to its ways are very slim indeed, unfortunately.

Saturday, 5 May 2018

In this brief post, the focus will be on updating the
stories we have covered in the past here in Financial
Regulation Matters regarding Wells Fargo and their performance over the
past decade or so. The last time we covered the scandal that has blighted Wells
Fargo’s progression was in May of last year, and since then there have been a
number of developments. However, very recently, the bank has received a number
of fines which demonstrate the failures that have left the bank struggling to
regain the trust it needs to move forward.

These fines are on top of what has already been levied
against them with regards to the accounts scandal, with it being reported
that the bank has already been mandated to pay more than $1.5 billion already.
On Friday, that figure increased with the news that the bank has ‘reached an
agreement in principle’ to settle a class-action lawsuit brought against it by
its shareholders for the reported
total of $480 million. The bank’s investors have stated that there had been
‘misstatements and omissions’ from key financial documents, which had the effect
of artificially inflating its stock price. In response to this development, the
bank suggested that its problems may not be over, with it being suggested that
the bank will need to find $2.6 billion more
than what it set aside to cover the actions taken against it (both in relation
to the accounts scandal and the auto/mortgage misdeeds).

It is clearly a very chastening time for the bank, and it is
right that these transgressions are coming to light. It was interesting to read
Warren Buffett’s comments on the bank recently – Berkshire Hathaway maintains a
9% interest in the bank – when he insinuated that the practices
within the bank are not much different from other banks its size. Buffett
and his approach will be discussed in a forthcoming post that is related to an
article this author has recently produced regarding the effect Buffett has upon
his businesses, but the sentiment he provides is a negative one; it is not
enough to say ‘they all do it’. Wells Fargo is rightly being held up as a clear
demonstration of the excesses within the financial sector, and even more so the
invasive potential of a commitment to ‘short-termism’. It would be comforting
to suggest that Wells Fargo will suffer serious and long-standing consequences
for their actions, as they surely should, but the reality is that they will
not. The reality is that they will pay their fines with the people responsible
for initiating such practices long gone because, as we saw in the last post, those
leaders were allowed to leave with compensation, rather than facing the
punishment that most would in any other circumstance.

Friday, 4 May 2018

In today’s post, the focus
will be on a recently accepted article produced by this author. The article,
which is concerned with examining a particular aspect of the post-Crisis
regulatory approach to affecting the industrial structure of the ratings
industry, has recently been accepted by the International
Company and Commercial Law Review. This author has examined this
particular aspect of the U.S. response to the Crisis before in a previous
article, but from a different perspective; in this article, the emphasis is
upon using the time that has passed since the establishment of the provision to
examine whether it has had any effect and, if not then why not.

The provision in question
is a very small section of the Dodd-Frank
Act 2010, and whilst the section covers a few aspects the article is
concerned with the attempt to encourage competition within this particular
sector. The multiple aspects can be best classified as the ‘Rule
17g-5 Program’ and it was the Dodd-Frank
Act that amended the relevant sections of the Exchange Act of 1934 which is the relevant Act in the U.S. when it
comes to governing the securities markets. The new provisions take aim at a
number of aspects, including the relationship between the commercial and rating
elements of the rating agencies, the relationship between the agencies and
issuers who use the ratings of a given agency over a certain threshold, and
also the independence of ratings analysts. For the article however, the focus
is upon a system that was established which was designed to break, or at least
lessen the barriers to entry. The system itself attempts to achieve this aim by
way of allowing non-commissioned rating agencies the same information that
commissioned rating agencies receive from issuers, with the sentiment being
that the non-commissioned agencies would conduct ratings in parallel to the
commissioned agencies to act as a sort of ‘check’ within the marketplace.
Technically, the commissioned NRSRO (Nationally Recognised Statistical Rating
Organisation) would create a password-protected internet site whereby the
information would be stored, and non-commissioned NRSROs could apply to gain
access to the information. One underlying sentiment of the provision is that
this procedure would allow lesser known agencies to gain recognition and
reputation by way of producing accurate ratings. However, there are a number of
issues with this procedure, and they are identified and examined within the
article.

Perhaps the biggest issue
is that attempting to affect an oligopolistic industrial structure takes a
concerted campaign, not just a small amendment to procedure. This author has
argued this on a number of occasions, but in this author’s forthcoming
monograph Regulating Credit Rating
Agencies: Restricting Ancillary Services, the point is made that the
problems that have (and continue to) emanate from the credit rating industry,
in part, stem from a misaligned regulatory focus – regulators continue to
develop actions that take aim at the desired
version of the industry, and not the industry as it actually operates. This divergence
is demonstrated here on a number of levels. Firstly, there is a time-delay in
the non-commissioned NRSROs receiving of the information, which serves to
reduce the effectiveness of any rating they produce. Secondly, only NRSROs are
allowed to request access, and for an agency to gain NRSRO status they must be ‘nationally
recognised’, which means they really should not have to undertake certain
actions to gain reputation anyway. With that in mind, the next issue is that
the provision is asking for-profit rating agencies to produce ratings and not
receive compensation for their efforts, which is one of the more obvious
reasons as to why no ratings have been
produced under the 17g-5 Program. All that has been produced so far are ‘commentaries’,
which have been discredited on the basis of allowing for agencies to promote
their own services to the detriment of others. In another example of the
divergence, regulators/legislators have seemingly overlooked the position of
issuers, who have responded in a predictable manner to the Program – to protect
themselves, they have endeavoured to essentially codify the majority of their
information as ‘confidential’, meaning that the information contained within
the password-protected sites is rarely enough to allow for an effective rating
to be constructed.

There are a few other
issues with the Program which are discussed in the article. However, the
article proposes that the Program can be a vehicle for positive change in the
industry, but that its parameters must be reconsidered in order to make it so.
There are a few aspects which need to be changed to bring about this reality,
but the clearest one is that the NRSRO designation attached to the Program
needs to be removed. The previous article introduced this point from within the
dynamic of non-profit rating agencies; the first article identified the International
Non-Profit Credit Rating Agency and the Credit Research Initiative
as just two offerings which could fill this proposed role for a number of
reasons. These non-profit offerings, in theory, perfectly demonstrate the
characteristics the 17g-5 Program calls for: they will be able and willing to
produce ratings without looking for compensation, they require a reputational
increase to compete, and they are perceived as independent (in theory) by the
marketplace on account of not being blighted by the ‘issuer-pays’ remuneration
model. The first article argued that these two initiatives should be merged
together to encompass their relative skillsets (sovereign and corporate bond
ratings), which would only further add to the effectiveness of the 17g-5
program.

Ultimately, it is important
to consider such regulatory initiatives as progressive, although there is still
plenty to be done. The credit rating agency problem that persists can be
lessened to some extent, but essentially the regulators and legislators must
fundamentally incorporate the reality
of the situation into their considerations. It was clear that issuers would
rebel, and also that CRAs would not be inclined to provide what are essentially
free ratings to the marketplace (particularly when they are for-profit
agencies). Yet, whilst it is important to remain positive, it is difficult to
overlook the fact that 8 years from the Dodd-Frank Act, very little has changed
in this industry – the oligopoly is now even more prevalent than it was, the
record-breaking fines have been easily absorbed by the two leading agencies,
and their core practice of protecting their methodological freedom has been
maintained. As this author focuses solely on the ratings industry, it is
important to note that the aim is not dismantle the ratings industry (as some
scholars have suggested), but simply to establish provisions which make the
traditionally transgressive approach of the industry something which operates
within defined constraints. Aspects such as those have been proposed in a
number of works by this author, but initiatives such as the Rule 17g-5 program
can be a positive factor if it is incorporated and progressed in a realistic manner.

Tuesday, 1 May 2018

Owing to the dynamics of the academic year, there has been
somewhat of a lull recently here in Financial
Regulation Matters, so to get up to speed a round-up of developments within
the banking sector seems like a good place to start. There have been a number
of developments since the last post, so today we will work our way through them
as efficiently as possible; the underlying sentiment is that the developments
portray a sector that is consistently changing since the Crisis, with a number
of aspects of that said Crisis continuing to play out (rather unsurprisingly).

We start with our old friends RBS, who have taken up a large
amount of space in Financial Regulation
Matters, mostly on account of their remarkable development since the
Crisis. Past posts have focused on the unique
relationship that continues between the bank and the government (on account
of its ownership of the bank), its terrible
performance (alongside the FCA) in relation to its treatment of SMEs, and
also its plans to restructure
its business in light of its troubles. Late last week it was announced that
the bank had recorded
nearly £800 million in profits (£1.2 billion in operating profit), which
was pushed in the business media as an extremely positive sign for the bank in
its quest to return to private ownership. However, whilst embattled CEO Ross
McEwan was quick to talk up the impact of these results, the reality is that
the results mask the impending penalties that lurk just over the horizon; RBS
is facing penalties for its performance in relation to Payment Protection
Insurance mis-selling (a continuing case that may come to a conclusion soon – more later), the actions of the ‘Global
Restructuring Unit’, and its performance in the Financial Crisis, particularly
with regards to the selling of U.S.-based securities. On that point, in March
it was being touted that, perhaps, ‘within
weeks’, the case could be concluded by the US DoJ (with some political
assistance from the British Government) which has not been the case – the bank
is potentially facing upwards of $10 billion in fines which would have a massive
effect upon this perceived upward trajectory. Yet, with the British Government
essentially lobbying on the bank’s behalf, news today that the bank
is closing 162 branches with a potential loss of 800 jobs is testament to
the dynamic where the assistance of the British taxpayer is considered
secondary to the health of the bank. There is a strong argument to say that
this is correct, in that the bank’s health will see it return to private
ownership and contribute to a healthier banking sector in the long term.
However, in the short-term, workers are being laid off during difficult
economic times, which is clearly a negative aspect. It is clearly a difficult
dynamic to judge, but the clear availability of a public safety-net obviously
does not factor into the industry’s thinking, which as a sentiment raises more
questions about the role of these
too-big-to-fail institutions within wider society.

Meanwhile, Barclays is experiencing similarly changeable
times, although of a different nature to that of RBS. We spoke previously about
Barclays’ boss Jes Staley and the investigation into his conduct with regards
to the treatment
of a whistleblower, and recently Staley received a number of pieces of good
news. Staley escaped that FCA
investigation with only a modest fine (rather predictably) and then
presided over financial results that show the bank’s investment arm is outperforming
the performance of its rivals, something which he has been championing in
response to the entrance of an activist investor who, to all intents and
purposes, would like to reduce the focus upon investment banking. Yet, all is
not well in Barclays, with news today that protesters have interrupted the bank’s
AGM to protest against the bank’s continuing
investment of fossil fuel-related projects. The bank has sought to react to
the protests by stating that they are ‘considering
our position to deal with these kinds of matters’, although that is
unlikely to stem the protests. The bank’s investment within fracking projects
close to home will likely result in more pressure, as recent calls for the bank
to commit to its pledges to divest from such projects have so far resulted in
very little action.

However, one aspect that Barclays avoided was the
I.T.-related disaster that has seen TSB brought sharply into the limelight. The
bank is currently in its second week of being affected by I.T. issues that had
been warned
about for over a year, with the height of the crisis culminating in almost 2
million TSB customers being locked out of their online accounts. Despite
the bank attempting to stem the bleeding by drafting
in I.T. experts, the leaders of TSB are continuing to come under pressure
for the performance of the bank, with CEO Paul Pester being summoned
by MPs to explain the fiasco. The bank’s compensation bill is rumoured to
potentially run into the tens of millions of pounds, and there are questions
currently being raised regarding whether Pester will receive
his bonuses. Consequently, the bank is facing a real crisis, because the
competition within this specific marketplace continues to increase, those
facing crises of this magnitude find themselves in real danger moving forward.

Finally, there has been developments recently for Lloyds,
specifically as they now own HBoS. The criminal investigation into the conduct
of a so-called ‘rogue’ unit that seemingly culminated in the imprisonment
of a number of associated people is potentially being re-launched by the National
Crime Agency – the NCA is currently deciding whether a new ‘full-blown
criminal investigation’ is warranted in relation to fraud undertaken by the
bank, specifically for instances that fell outside of the original police
investigation. The proposed investigation comes after a number of allegations
were brought forward regarding fraud, but it is also interesting to see how the
NCA operates in this particular scenario because of the political
battles taking place regarding the superiority of the NCA and the Serious Fraud
Office – it will be interesting to examine, but this may be the opportunity
the NCA needs to establish itself as the eminent department in the fight
against fraud.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.